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Blockchain explained - how and why it works

I will explain to you how a blockchain works. You will also understand what problems it solves. However there is no such thing as the one blockchain, but there are countless of them with different characteristics.

Simply explained, the blockchain is nothing more than a database. And a rather inconvenient, slow and inefficient database at that. So why is blockchain technology needed? Because it is also a tamper-proof database!

The blockchain is an database

You already know databases from countless applications. They do nothing more than store large amounts of data without contradiction and permanently and make it accessible again. In traditional databases, documents, image files, account balances and much more are stored digitally. The data is stored on physical storage, sometimes redundantly with backups. The data is therefore stored in only one or two locations. Whoever has sovereignty over the database storage can set access rights and can also modify the data.

The blockchain is a decentralized database. It consists of many computers that participate in the blockchain network. They are all connected to each other via the Internet. The exact same information is stored on all participating computers. So, unlike traditional databases, the data on the blockchain is stored not just once, but multiple times: exactly as many times as computers participate in the network.

The Bitcoin-blockchain explained

Further on, I will explain the concept using the Bitcoin blockchain as an example: on it, everything is all about the Bitcoin coins. The network verifies every transaction between sender and receiver. It checks whether the coin sent was really spent only once, or whether the sender wanted to cheat. The transaction is stored "on the blockchain" after positive verification.

For a detailed understanding of how the Bitcoin blockchain works, let's look at the two terms: Block and Chain.

The term Block

A transaction is every process in which Bitcoin coins change hands or Bitcoin coins are created. Each transaction is sent to all computers that participate in the Bitcoin blockchain. Each computer collects all incoming information together until a so-called block has been filled. Once the block is filled, all computers on the network simultaneously begin solving a complicated mathematical puzzle. The solution requires high computational effort, which is only feasible by special computer components using high amounts of energy.

The solution to the puzzle generates the cryptographic key for this block, which seals the transactions in the block. This is because the key depends on the transactions stored in the block: any change in the transactions requires a recalculation of the key.

The first computer to find the solution adds the cryptographic key to the block and sends the entire newly created block to all participants in the network. The winner gets paid a reward in newly created bitcoin coins for its resource input (the process is called mining), the other participants go away empty-handed.

The term Chain

The blockchain chain consists of blocks strung together one after the other. The subsequent immutability of all blocks is ensured by inserting the cryptographic key of the previous block into the respective new block. Thus, a chain of blocks encrypted into each other is formed. The chain becomes longer and longer, only one new block is added at a time, and no block can be removed.

Thus, if a fraudster wanted to change a previous transaction in an old block, he would have to recalculate the key of the old block and all others up to the current block, and additionally change the copy on the majority of participating computers. Abuse is prevented because this high effort is economically unattractive.

The properties of other blockchains

The main properties of a blockchain are:

  • Each participant holds a copy of the entire database
  • Anyone can view all transactions on the blockchain
  • But no one will change the data on the blockchain

Other blockchains differ from the Bitcoin blockchain described above primarily in the characteristics of speed, security and decentralization. This is because an optimum must be found between these three characteristics.

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